What kind of car insurance do you really need?

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Written by
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Reviewed by
Farmers CSR for 4 Years
UPDATED: 2022-07-22T10:57:10.589Z
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A photo of someone searching for car insurance on a laptop to figure out what kind of car insurance they need.

Car insurance provides financial protection if you cause an accident, an injury, or damage property through your vehicle. It also protects you from the financial liabilities caused by accidents and other events like theft and vandalism.

Since there are various kinds of car insurance coverage, an important question for you may be what type of car insurance to buy?

To choose the right kind of insurance for your car, you need to consider factors such as the value of your car, your location, and your budget as well as your driving history.

You would also need to consider the legal requirements mandated by your state. Every state, barring New Hampshire and Virginia, requires a minimum level of insurance. Apart from the mandatory coverage required by law, there are other kinds of cover options available that you can choose depending upon your circumstances.

Through this article, you’ll be able to understand the different kinds of car insurance coverage options as well as the coverage limits. It will enable you to decide what kind of car insurance to buy to best suit your needs.

Types of Car Insurance

A great starting point when choosing car insurance is understanding the options available and the differences between them. There is mandatory coverage that is legally required, and then there are additional coverage options or add-ons you may choose based on your needs.

Liability Insurance

Liability insurance covers the cost arising out of any injury or damage that you cause to another person (driver, passenger, or pedestrian) or property due to your fault. It covers medical bills, costs related to repair of damaged property, legal fees and settlement costs.

For states that require an insurance cover, it is essentially liability coverage that they are looking for. A few states may allow you to forego liability insurance, but you need to demonstrate your ability to cover the costs arising out of an accident.

There are two kinds of liability insurance. Property damage liability insurance (PD) covers costs associated with property damage. This property could be another vehicle or any private or public property. Bodily injury liability insurance (BI) covers costs related to injuries caused to people.

Each state has minimum requirements for liability coverage that you must follow. If you can afford it, it is better to go above the minimum requirement. If your claims exceed your coverage’s upper limits, you will have to pay them from your pocket.

Hence, it makes sense to have a buffer amount that will help prevent a situation where you have to pay a significant amount on your own in the case of an accident.

Personal Injury Protection

Personal injury protection (PIP) covers medical expenses and related costs (depending on the policy) for you and your passengers if you suffer injuries in an accident.

This insurance does not take into account who was at fault and will take care of your bills regardless of who caused the accident. Several states require you to have personal injury protection coverage.

Uninsured Motorist or Underinsured Motorist Coverage (UM)

Although most states require liability insurance, many people don’t comply with the law. Research by the Insurance Research Council suggests that nearly 13% of motorists do not have insurance. There are also instances where the driver may have an insurance cover which isn’t enough to pay for the damages or injuries they may have caused.

Although the driver at fault has a personal liability, they often don’t have the resources to pay for these expenses out of their pocket. It is in these circumstances that uninsured or underinsured motorist coverage comes to the rescue.

The insurance will pay for the medical expenses, damages, and other costs that you incur because of the accident in case the driver doesn’t have insurance. It will pay costs over and above his policy limits if he does have insurance.

A few states have made this insurance mandatory.

Collision Insurance

If you are in an accident, liability insurance will cover the costs related to the damage or injuries you’ve caused. However, you will also need money to repair your car. Collision insurance pays for the repair of your car, no matter who is at fault.

If your car gets totaled in an accident, collision insurance will pay you the value of your car. It is not a legal requirement in any state. However, data suggests that nearly 74% of drivers purchase collision insurance.

Comprehensive Insurance

All the insurance coverage options that we have discussed so far cover the damages and injuries caused directly by car accidents. However, there are other possible risks that you may face which are not related to other cars or driving.

Things such as theft, vandalism, falling objects, extreme weather events, fire, floods, and animal collisions may also cause damage. Comprehensive insurance will cover damages arising out of any situation.

Gap Insurance

If you’re still paying for your car loan or lease and your car gets in an accident or gets stolen, your insurance pay-out may not be enough to cover the loan payments. In such situations, gap insurance can come handy to cover the ‘gap’ between what you owe and what you get paid.

Additional Coverage

There are several other coverage options that you can buy if they meet your needs and requirements. Some of the popular add ons include roadside assistance that can help if you have a flat tire or your car needs towing.

You can add a new car replacement coverage which will help pay for a new car if your current car gets totaled within a short period after purchase.

Personal item coverage can cover the cost of your belongings that were in the car when it gets damaged or stolen.

Rental reimbursement coverage helps you pay for your transportation costs, such as a rental or public transport, while your car is undergoing repairs.

Which Car Insurance Does your State Require?

Most states have minimum car insurance requirements for you to be able to drive legally. Before we discuss the insurance coverage that your state may require, let’s look at the exceptions.

Two states don’t require you to have car insurance: New Hampshire and Virginia.

New Hampshire motor vehicle laws don’t mandate you to have car insurance. However, you should be able to show that you will be able to provide adequate funds to cover damages resulting from accidents where you are at fault.

The amount of proof you need to provide is up to $50,000 for injury and $25,000 for property damage.

In Virginia, you can pay the state an uninsured motor vehicle fee of $500 per year in place of purchasing insurance. However, it will not provide any financial protection if you are in an accident. You will need to cover the damages and expenses out of your pocket.

All states barring New Hampshire require you to have liability insurance. All states except Florida require bodily injury liability insurance (BI) and all 50 states require property damage liability insurance (PD).

A total of 16 states require personal injury protection coverage. It is a crucial feature of no-fault insurance systems that are in use in twelve states. Four other states have also made it mandatory even though they don’t use the no-fault system.

Nearly 22 states require uninsured motorist coverage, while 14 states require underinsured motorist coverage.

This summary gives you a fair idea of the kind of insurance coverage you need as per the law in your respective states. The next step is to understand the amount of coverage you need.

Car Insurance Coverage Limits

You need to meet the minimum amount of car insurance coverage set by your state. This is a good starting point. However, these minimum amounts may not always provide adequate coverage in the event of an accident.

If you cause an accident for which the damages exceed the minimum coverage amount, you will have to bear the rest of the expenses. If you are not able to pay for these costs, your savings, home, and other assets may be at risk.

While low coverage limits can save you some money on the premium, they can cost you much more later. Hence, it is sensible to go for as much as you can afford. Here are some thoughts to keep in mind when choosing the limits for each coverage type:

Liability Insurance

The minimum coverage you need varies across states. It ranges from $15,000 in Pennsylvania and Louisiana to $50,000 in Alaska and Maine for bodily injuries. However, we recommend getting as much liability coverage as you can afford.

As per data, over 200,000 people require hospitalization to treat injuries resulting from car accidents. These bills cost about $3,500 in emergency room costs and $57,000 for hospitalization. Liability claims can sometimes be as high as 1 million dollars.

As you can see, if you choose minimum coverage, you may need to shell out quite a big amount from your pocket. To avoid such situations, get as much liability coverage as possible.

Personal Injury Protection (PIP)

The minimum coverage required by states can vary between $1,000 to $50,000. However, not all states need you to purchase this coverage. If your state requires you to have PIP coverage, it can be okay to go for the minimum amount.

Your health insurance can cover a lot of the costs that PIP pays for. If you and your passengers have adequate health insurance, it is okay to forego PIP.

Uninsured or Underinsured Motorist Coverage

Nearly half the states require you to have this coverage. The minimums vary from $15,000 to $50,000 per person. However, even if your state’s driving law does not mandate it, we recommend getting one.

It can be extremely useful if you are in an accident caused by an uninsured person. You can add this insurance cover to your policy for fairly low prices. It is important to note that this coverage usually requires a deductible.

Collision Insurance

No state requires collision insurance. However, 3 out of 4 drivers get this coverage. If your vehicle is old and you have enough money to repair or replace it if it is in an accident, you can skip collision insurance.

Comprehensive Insurance

If you live in an area that is prone to floods, fires, or other natural disasters, it makes sense to get comprehensive coverage. It will protect you from the costs related to the damage. If your car is on a loan or a lease, your financier may require you to get this coverage.

Both collision and comprehensive insurance require deductibles so keep in mind how much you can pay out of pocket before the coverage kicks in.

All the additional coverage options depend on your needs. If you don’t mind paying extra for things like roadside assistance and personal items coverage, you can add them to your insurance plan. However, you’ll be in a good place if you get adequate coverage on the options we have listed above.

Other Factors

The type and limits of insurance coverage are probably the two most vital factors when deciding on what kind of car insurance to buy. However, you will also need to account for factors such as your age, your driving record, your location, the kind of car you drive, the deductibles you can afford to pay as well as the safety features your car already has.

These can have a profound impact on the decision you make regarding your insurance coverage.

Car insurance is a critical investment that can protect you from major financial risks if you find yourself in an accident. It is important to be well informed to make the right decision. With this guide, you are sure to choose the insurance coverage that protects you against any eventuality and also meets your budget.

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